Key Takeaways
- • The KBRA DLD Direct Lending Index reports trailing 12-month default rates have climbed to 2.3% of issuers as of June 16, 2026, matching the peak level first recorded at the index's inception in late 2023, signaling renewed stress across the $1.8 trillion direct lending sector.
- • KBRA forecasts default rates will continue deteriorating to approximately 3.5% by year-end 2026, representing roughly 111 defaulted issuers, with loan-weighted defaults projected to rise from 1.4% in 2025 to 2.5% in 2026, translating to an estimated $7.6 billion in defaulted loans.
- • The index tracks approximately 3,000 issuers and roughly $300 billion in business development company holdings, providing a comprehensive view of direct lending market health across a concentrated segment of the broader private credit ecosystem.
- • Elevated interest rates, weakened underwriting discipline, and technology sector exposure—particularly companies vulnerable to artificial intelligence disruption—are driving the deterioration in credit quality across direct lending portfolios.
- • Liquidity stress is emerging across private credit funds, with some managers imposing withdrawal restrictions following elevated redemption requests; first-quarter withdrawals from private credit strategies reached approximately $13 billion, and publicly listed asset managers have begun tightening liquidity terms.
Summary
Default rates across the private credit market have returned to peak levels, according to a report from Kroll Bond Rating Agency. The KBRA DLD Direct Lending Index shows the trailing 12-month default rate reached 2.3% of issuers as of mid-June 2026, matching the highest level recorded since the index's inception in late 2023. This marks the first time the benchmark has returned to that peak after a period of relative stability, underscoring mounting stress within the $1.8 trillion direct lending sector.
The deterioration signals a more challenging operating environment for borrowers and growing concerns about credit quality across private credit portfolios. KBRA projects conditions will worsen further, forecasting default rates to climb to approximately 3.5% by the end of 2026. On a loan-weighted basis, defaults are expected to rise from 1.4% in 2025 to 2.5% in 2026, equating to an estimated $7.6 billion in defaulted loans over the year. The index tracks roughly 3,000 issuers and approximately $300 billion in business development company holdings, providing broad exposure to the direct lending market.
Multiple pressures are converging to drive the credit deterioration. Elevated interest rates continue to burden borrowers' debt servicing capacity, while concerns have intensified around underwriting discipline within private credit portfolios. Exposure to technology and software companies has amplified investor caution, particularly given concerns about disruption from artificial intelligence advances. Additionally, liquidity strain is emerging across private credit funds themselves, with some managers implementing withdrawal restrictions in response to elevated redemption requests as investors seek to reduce exposure to stressed assets. First-quarter withdrawals from private credit strategies reached approximately $13 billion, and publicly listed asset managers have begun tightening liquidity terms, creating additional pressure on the sector.
The deterioration signals a more challenging operating environment for borrowers and growing concerns about credit quality across private credit portfolios. KBRA projects conditions will worsen further, forecasting default rates to climb to approximately 3.5% by the end of 2026. On a loan-weighted basis, defaults are expected to rise from 1.4% in 2025 to 2.5% in 2026, equating to an estimated $7.6 billion in defaulted loans over the year. The index tracks roughly 3,000 issuers and approximately $300 billion in business development company holdings, providing broad exposure to the direct lending market.
Multiple pressures are converging to drive the credit deterioration. Elevated interest rates continue to burden borrowers' debt servicing capacity, while concerns have intensified around underwriting discipline within private credit portfolios. Exposure to technology and software companies has amplified investor caution, particularly given concerns about disruption from artificial intelligence advances. Additionally, liquidity strain is emerging across private credit funds themselves, with some managers implementing withdrawal restrictions in response to elevated redemption requests as investors seek to reduce exposure to stressed assets. First-quarter withdrawals from private credit strategies reached approximately $13 billion, and publicly listed asset managers have begun tightening liquidity terms, creating additional pressure on the sector.
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